Gold versus Foreign Currencies

Discussion of the Gold portion of the Permanent Portfolio

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Clive

Gold versus Foreign Currencies

Post by Clive » Thu May 06, 2010 3:55 am

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Last edited by Clive on Mon Jul 04, 2011 2:39 pm, edited 1 time in total.
Roy
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Re: Gold versus Foreign Currencies

Post by Roy » Thu May 06, 2010 6:14 am

Clive wrote:
Does not then a basket of foreign currencies provide similar protection to that provided by gold against domestic currency hyper inflation?

My thoughts are that if there were say an ETF that had equal cash holdings in a wide range of currencies, then that ETF's price would rise and fall in domestic currency terms according to how well or poorly the domestic currency performed.  If the domestic currency declined significantly relative to the others (hyper inflation) then those foreign notes would become much more valuable in domestic currency terms (ETF's price would rise significantly). 

Might then a PP be reduced down to just three components, stocks, LT's and a third international currencies basket - with that third component being representative of both the gold and cash PP components?
Hi, Clive,

I'm not sure that currency diversification adds anything more than some (default) risk.  There is greater diversification but I don't think there would be greater expected return in compensation.  So then, I'd have to question whether sovereign debt would be honored as easily as US Treasuries—and for no gain.  (I think currency risk is better mitigated on the equity side, but that does not solve your hyper-inflation problem, especially as the inflation may not be bounded locally.)  And in losing the Gold, you lose a class that can move quickly and powerfully to counter shocks.

As a "safe haven," Gold seems to supply crises/panic protection, at least in some instances, beyond the hyper-inflationary threat.

Roy
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Re: Gold versus Foreign Currencies

Post by MediumTex » Thu May 06, 2010 8:34 am

All modern governments have bought into the idea that a steady level of low inflation is desirable to keep the velocity of money high and to keep the economy expanding (whether or not there is actual underlying aggregate demand to facilitate this expansion).

Thus, over time all world currencies will slowly devalue relative to gold, which is what they are designed to do.

If you know that an investment is designed to lose value, why would you choose it as protection against inflation?

The multi-currency approach is, to me, more of a trading strategy than an investment strategy.
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Re: Gold versus Foreign Currencies

Post by MediumTex » Thu May 06, 2010 12:10 pm

Clive,

Sorry, I thought we were talking about a currency basket as an alternative to gold, not as an alternative to the cash portion of the PP.

If we are talking about a currency basket as an alternative to local currency in the cash piece of the PP I would say that it depends on where you live.  If you live in the U.S. I would say that the dollar's current reserve currency meets all of the U.S. investor's cash-related needs in the portfolio.  For a non-reserve currency nation, perhaps a basket would make more sense. 

HB's thesis was that gold and the U.S. dollar were the two favorite international currencies.  This was prior to the introduction of the euro, but I'm not so sure that his thesis isn't still basically sound. 
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Re: Gold versus Foreign Currencies

Post by MediumTex » Thu May 06, 2010 1:20 pm

Clive wrote:What are your thoughts about a spread of foreign currencies for the cash component for non-US PP'ers compared to that of perhaps holding of all of CASH in USD Tex?

To me having perhaps 2.5% of total funds in each of 10 different currencies seems more comfortable than having 25% in USD.
If I were a UK PP-er, I might look into a mix of pound, euro, US dollar and Swiss franc holdings, with a greater weighting to the pound, since that is probably what the grocer down the street accepts. 
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Re: Gold versus Foreign Currencies

Post by craigr » Thu May 06, 2010 5:45 pm

The only thing I'd caution with relying on foreign currencies for diversification vs. gold is that many foreign central banks will try the same tricks at the same time so nobody is put at a disadvantage. The drive for exports seems so all consuming that many policy makers feel it is an advantage to debase their currency faster than the neighbors.

On the other hand, gold bullion is not suddenly going to decide to print a bunch of itself in a closed door meeting to appease various special interests or political candidates.
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